Variance Risk Premium Components and International Stock Return Predictability with Juan M. Londono
We document and explain the distinct dynamics and international predictability patterns of U.S. downside and upside variance risk premiums (DVP and UVP, respectively). We find that DVP, the compensation for bearing downside variance risk, is positive and countercyclical, whereas UVP is borderline positive with often negative spikes. Acknowledging for asymmetry in variance premium significantly improves its international stock return predictability. To rationalize our findings, we solve a dynamic asset pricing model featuring asymmetric non-Gaussian shocks and partial integration. We find that DVP is mostly driven by risk aversion, whereas UVP loads negatively on downside economic uncertainty. Moreover, DVP (UVP) transmits to international markets through financial (economic) integration.
◘◘ IFABS 2019 Medellín Conference (2019/12), Stanford SITE "Session 7: Asset Pricing Theory" (2019/08), NASMES Summer Meeting (2019/06), ECWFC@WFA (2019/06), FMA Global Conference in Latin America (2019/05), E(astern)FA 2019 (2019/05), MFA 2019 (2019/03), Federal Reserve Board (2019/03), Econometric Society European winter meeting 2018 (2018/12), 2018 CIRF (2018/12), Boston Macro Juniors Workshop (2018/11), Boston College Carroll (2018/11)
◘◘◘ Semifinalist, 2019 FMA Global Conference Best Paper Awards
 Global Risk Aversion and International Return Comovements
I establish three stylized facts about global equity and bond return comovements: Equity return correlations are higher, asymmetric, and countercyclical, whereas bond return correlations are lower, symmetric, and weakly procyclical. To interpret these stylized facts, I formulate a dynamic no-arbitrage asset pricing model that consistently prices international equities and bonds; the model features various time-varying global macroeconomic uncertainties and risk aversion of a global investor. I find that different sensitivities of equity returns (strongly negative) and bond returns (weakly positive or negative) to the global risk aversion shock can explain the observed comovement differences. Global risk aversion explains 90% (40%) of the fitted global equity (bond) comovement dynamics.
◘◘ 2020 AEA (scheduled), Stanford SITE "Session 8: The Macroeconomics of Uncertainty and Volatility" (2019/08), 2019 UBC summer conference (2019/07), University of Zurich (2018/12), University of Luxembourg (2018/12), London Business School (2018/09), 2018 E(uropean)FA (2018/08), 2018 CICF (2018/07), Boston College (Carroll), Cornerstone, Emory (Goizueta), Georgetown (McDonough), Goldman Sachs, Johns Hopkins University (Carey), University of California (Riverside), University of Minnesota (Carlson), University of Notre Dame (Mendoza), University of Oklahoma (Price), University of Southern California (Marshall), University of Wisconsin Madison, Finance Ph.D. Seminar, NYU Stern (2017/12), Finance Faculty Free Lunch, Columbia Business School (2017/11), Ph.D. Seminar, Columbia Business School (2017/10), Financial Economics Colloquium, Econometrics Colloquium, Columbia University (2017/10, 11), Federal Reserve Bank of New York, New York (2017/09)
◘◘◘ Dissertation Award, Federal Reserve Bank of New York, New York 2017
 Procyclicality of the Comovement between Dividend Growth and Consumption Growth
Revise & Resubmit at the Journal of Financial Economics; 3rd round
Duffee (2005) documents that the conditional covariance between market returns and consumption growth, or the amount of consumption risk, is procyclical. In light of this “Duffee Puzzle”, I demonstrate empirically that the conditional covariance between the immediate cash flow part of market returns (dividend growth) and consumption growth is (1) procyclical and (2) a consistent source of procyclicality in the puzzle. Moreover, I solve an external habit formation model that incorporates realistic joint dynamics of consumption growth and dividend growth. The procyclical consumption-dividend comovement leads to two new procyclical terms in the amount of consumption risk via cash flows and valuation channels, respectively. These two procyclical terms play an important role in generating realistic magnitude of consumption risk, thus potentially accommodating the Duffee Puzzle.
◘◘ 2018 E(astern)FA (2018/04), 2018 MFA (2018/03), 2017 SoFiE Conference (main conference), New York (2017/06), Federal Reserve Bank of New York, New York (2017/06), 2017 AEA/AFA/ASSA (poster presentation), Chicago (2017/01), 28th Australasian Finance and Banking Conference (AFBC), Ph.D. Forum (2015/12), 28th AFBC, Asset Pricing II (2015/12), Ph.D. Seminar, Columbia Business School (2015/11), 15th Transatlantic Doctoral Conference, London Business School (2015/05), Third-year paper presentation, Columbia Business School (2015/01)
◘◘◘ winner of 28th AFBC 2nd best paper at the Ph.D. Forum (2015/12)
We formulate a dynamic no-arbitrage asset pricing model for equities and corporate bonds, featuring time-varying risk aversion and economic uncertainty. The joint dynamics that we specify among asset-specific cash flows, macroeconomic fundamentals and risk aversion accommodate both heteroskedasticity and non-Gaussianity. As the main contribution, the model delivers measures of risk aversion and uncertainty at daily frequency. In addition, we find that variance risk premiums on equity are very informative about risk aversion, whereas credit spreads and corporate bond volatility are highly correlated with economic uncertainty. Our model-implied risk premiums outperform standard instruments for predicting excess returns on equity and corporate bonds. A financial proxy to economic uncertainty predicts output growth significantly and negatively.
◘◘ 2019 EFA (2019/08), 2019 CICF (2019/07), 2019 EFMA (2019/06), 2019 FIRS (2019/05), 15th European Winter Finance Summit (2019/03), 2019 MFA (2019/03), 2019 AFA (2019/01), 31st Australasian Finance and Banking Conference, Sydney (2018/12), 2018 CIRF (2018/12), University of Zurich (2018/12), University of Luxembourg (2018/12), 2018 NFA (2018/09), "Machine Learning and Finance: The New Empirical Asset Pricing" hosted by University of Chicago Booth (2018/07), 2018 North American Summer Meeting of the Econometric Society (2018/06), 11th Annual SoFiE Conference (2018/06), Baruch College (2018/05), Federal Reserve Board's Conference on Risk, Uncertainty, and Volatility (2018/04), Columbia Women in Economics (2018/03), Columbia Business School (2018/03)
◘◘◘◘ winner of Global association of research professionals (GARP) research excellence award, China International Risk Forum (2018/12)
 Mood Propagation with Xing Huang
◘◘ WAPFIN @ Stern, New York (2018/09)
◘◘◘ winner of Boston College Research Expense Grant, 2018-2019
◘◘ SNB-FRB-BIS High-Level Conference on Global Risk, Uncertainty, and Volatility (scheduled), 20th IWH-CIREQ-GW Macroeconometric Workshop: Micro Data and Macro Questions (2019/10), Conference on Advances in Applied Macro-Finance, Istanbul, Turkey (2018/12)
 Bond Home Bias
The three stylized facts as established in Xu (2017b) suggest that international bond investment for a global (U.S.) investor is potentially more attractive from the perspective of diversification benefits, which at first glance seems to deepen another little-known puzzle: bond home bias is significantly higher than equity home bias (Coeurdacier and Rey, 2013).
 Investor Attention and Equity Risk Premium with Melk Bucher (McKinsey)
Traditional asset pricing models assume that information is instantaneously incorporated into prices when it arrives, which immediately assumes investor full attention during all times. Da, Engelberg, and Gao (2011) however show direct evidence that investors appear to have limited attention and it is time-varying. Our paper formally proposes and estimates a measure of investor attention arising from a conditional asset pricing model using a large cross-section of stocks. Our measure allows an endogenous attention to reflect the empirical fact that investors choose its appropriate degree in the wake of changing fundamental (state) variables, such as e.g. information flow.
 Growth Dynamics at Different Stages of Development with Geert Bekaert
This paper characterizes growth rates at different stages of economic and financial development of 180 countries over 55 years (1960-2014). We present several static stylized facts. In particular, low development stage appears with high growth volatility and positive growth skewness, which is potentially caused by significant growth spurts in these country-years.